The US may have to swallow a bitter pill in its confrontation with Iran. Yet, Brent crude’s surge above $100 per barrel could accelerate inflation, weigh on economic growth, and increase political pressure on the Republican Party ahead of the midterm elections. Let’s examine the implications for the EUR/USD pair and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- Brent surged above $100 for the first time in two months.
- Markets are pricing in a 1-in-3 chance of a Fed rate hike.
- The ECB failed to boost the euro.
- Short positions can be considered if the EUR/USD pair breaks through 1.137.
Weekly Fundamental Forecast for Dollar
Oil is setting the direction, but the magnitude of the EUR/USD pair’s move will ultimately depend on central banks. Brent crude’s surge above $100 per barrel, fueled by the Yemeni Houthis opening a second front in the Red Sea, has pushed 10-year US Treasury yields to their highest level since early 2025. Meanwhile, futures markets are pricing in roughly a one-in-three chance of a Fed rate hike in July. If the Fed delivers a surprise as early as next week, the US dollar could strengthen further against other major currencies.
Central Banks’ Interest Rates
Source: Wall Street Journal.
The ECB offered little support for the euro. Christine Lagarde adopted a relatively hawkish tone, revealing that some Governing Council members had favored an immediate rate hike. Nevertheless, the meeting concluded largely as expected: policymakers postponed any tightening until at least September to assess developments in the Middle East. In fact, the euro had already begun to weaken before Lagarde’s press conference, as the rally in Brent crude triggered a classic “buy the rumor, sell the news” reaction.
Meanwhile, the US faces no easy choices. Diplomacy has struggled to contain tensions with Iran. The US has made repeated attempts to de-escalate the conflict—including a ceasefire in April and a diplomatic agreement in June—but both efforts quickly unraveled. At the same time, higher energy costs increase the risk of accelerating inflation, threatening US economic growth while raising political pressure on the Republican Party ahead of the midterm elections. Moreover, stubborn inflation would likely force the Fed to tighten.
US Inflation and Fed Interest Rate
Source: Wall Street Journal.
On the one hand, a Fed rate hike in July would seem surprising given June’s softer inflation data. Consumer prices were higher in May, yet the FOMC left policy unchanged at its previous meeting. On the other hand, policymakers may come to regret that decision if Brent crude climbs to $120–150 per barrel before the next meeting in September. In that scenario, inaction in July could be viewed as a policy mistake—the very type of error Kevin Warsh has criticized the Fed for making in the past.
The rising probability of a more hawkish Fed increases the risk of further downside in the EUR/USD pair. The euro’s best chance of recovery would be an unexpected de-escalation of tensions in the Middle East, which could quickly reverse the recent surge in oil prices. History shows that when Brent has climbed above $100 per barrel, the conflict has often ended just as abruptly as it began, suggesting such an outcome cannot be ruled out.
Weekly Trading Plan for EUR/USD
A decisive break below the 1.137–1.147 consolidation range would strengthen the bearish outlook for the EUR/USD, opening the way toward downside targets at 1.127 and 1.120. Conversely, if sellers fail to push EUR/USD quotes below the 1.137 support level, the pair is likely to remain trapped within its current trading range.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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